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Gold and Silver, Look at the Big Picture

Commodities / Gold and Silver 2011 Mar 23, 2011 - 07:39 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleJohn Pugsley, author of the highly successful newsletter, The Stealth Investor, is struggling with some sudden health issues. But in this exclusive interview with The Gold Report, he shared his insight on how the global economic situation, including the catastrophe in Japan, is affecting the prospects for precious metals-related investments.

Editor's Note: Shortly after this interview was recorded, Mr. Pugsley suffered a major heart attack. Our thoughts are with him and his family as we share his insights. New subscriptions to The Stealth Investor have been temporarily suspended.

The Gold Report: Good morning, John. Please start by commenting on how the tragedy in Japan and conflicts in the Middle East might affect precious metals and mining stocks in the near future.

John Pugsley: We are in a particularly exciting period for speculating in the natural resource area and specifically the mining stocks. What's going on right now in the world is we've gotten totally into paper money. Governments have had a big backlash from all the money that was printed over the last 20 years in all of the major countries of the world. When the 2008 economic bubble swept across the globe, governments tried to solve it by printing more paper money. Every time they get into a problem, they think they can bail out their past credit excesses by creating more credit. This is absolutely going to lead to inflation. Whether we want to call it hyperinflation or not, it's going to come and it's going to come with a vengeance. That's the opportunity for all of us because this pile of government debt is building in all the banks and pensions funds around the world.

TGR: So how does the situation in Japan fit into this picture?

JP: It is absolutely insane to think that rebuilding after the devastating earthquake and tsunami in Japan could act as stimulus for GDP growth. That would be like saying that building bombs and blowing things up during a war stimulates the economy. That doesn't create a better world for anybody. If wiping out entire cities really does create a rising GDP and standard of living, why not just go ahead and do that periodically and have a wonderful economy. That's just insane. Instead, they're going to print enormous quantities of paper yen, which will result in passing the loss on to lower-income individuals just as the federal deficits in the United States are passing losses down to the lower classes.

When prices rise, the retired and those on limited incomes will be the victims. I feel sorry for them. But, by the same token, those of us who have some assets can take advantage of this by positioning ourselves outside of the paper-money bubble by investing in natural resource commodities like gold and silver. The real assets are the things we use everyday—copper, steel, zinc, lead and aluminum. These natural resources are the opposite end of money—they are what the price level is priced against. The opportunities are going to be enormous in the next five years. That's why every time we see a dip in any of these areas, we're going in and buying. If they fall more, we buy more. So, we're positioning ourselves.

TGR: When you point out copper, steel, zinc and lead, those are commodities that are used in an expanding economy. Are you so bullish on them because you're expecting that, worldwide, we're going to have an expanding economy over the next several years?

JP: Well, I'm very hesitant to ever try to judge the short-term direction of anything. I'm looking at the longer term. I don't think we're going to see a lot of expansion in one year, but that doesn't mean we're not going to be using these commodities. Clearly, when the world or one country goes into a recession there's a lot less copper, zinc, lead, aluminum and so on used. But, those are only temporary setbacks.

The fact is that I have a very, very long-term positive view on the progress of man. There's a wonderful book out now called The Rational Optimist: How Prosperity Evolves (Matt Ridley, Harper, 2010). It really helps you realize how, decade after decade, century after century, people are getting richer and richer. They're demanding more and more in the way of standard of living. With India and China—and not too long ago, the Soviet Union—opening up to free market and free enterprise and breaking down some of the governmental barriers to individual initiatives, we're going to see rising demand for goods and services. Look at the automobiles, refrigerators, air conditioners and cell phones that we have. This has happened very rapidly over the last decade and it's going to continue. So, whether we have a brief setback here with this recessionary period of maybe two, three, five years doesn't really break the long-term trend. It's just one of those dips that provides buying opportunities.

TGR: How are you taking advantage of this situation?

JP: This is one of the reasons that we happen to be in the prospect-generation area. We're at the very beginning. Most of our companies are not producing companies. Most of the things we look for are very tiny, what are known as "prospect generators." They're at the hot end of the whole business. History proves that discovery, and then selling off to property developers is the more aggressive, explosive, profit-making area. This is where the real money's been made in the last decade and where we've made our money. You have to take a long view, however.

Between the time someone discovers a copper, gold or zinc deposit and the time it's actually put into production is three, four, five, six years or longer. So, we're not looking for instantaneous turnaround despite the fact that we've had some of those. The gap between picking up a few streambed samples, trenching and finally punching a hole and turning it into a mine is very involved. So, I don't really look at the short term. I'm very optimistic about the 5- to 10-year run going forward.

TGR: It sounds like your position really hasn't changed over the last year. So, despite the fact that most of these prices have risen substantially, you still believe that they present excellent prospects for investors out there?

JP: Yes, and they're coming all the time. You just have to find the young companies, the new companies with bright young geologists behind them to go out and look. Because commodity prices have gone up, it has created a tremendous interest in this area. That's one of the reasons that some of our juniors and some of our majors have improved so quickly. Rick Rule, who just returned from the Prospectors and Developers Conference (PDAC) in Toronto, said attendance at that event has exploded from 1,500 to 33,000 attendees in the 10 years he has been attending. That just tells you that people are flooding into a sector that's doing well.

TGR: Isn't that a dangerous sign?

JP: In 1928, every bellhop and elevator operator was touting stocks to anyone who would listen. Clearly, it was a bubble market. Whether this is a bubble market right now for these commodities depends upon the value of money. If I'm correct and the trillions and trillions of dollars, yen, deutsche marks and euros pouring into the banking systems continues, everything is going to go up in price.

One of the things that has to go up in price is the raw commodities that will be needed to continue civilization as we know it. So, I don't think we have to look at this last period as a bubble that must be corrected. Sure it could correct somewhat, but I think the offsetting event here is the printing of this paper money. At some point, this has got to start coming back into the market. When prices start going up, that means the prices of commodities have to go up proportionately.

TGR: So, when you last interviewed with The Gold Report in April 2010, you told us about some of the resource-based stocks you were invested in at that point. You had some nice gains in those. I was wondering if you could give us an update on what's happened with them.

JP: We've had some excellent experiences with many of our prospect generators. Esperanza Resources (TSX.V:EPZ) was one that we bought and really liked. The company was a prospect generator and it had a property in Peru that looked very, very exciting called the San Luis Project. Esperanza sold that off to Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI). It hasn't participated greatly in the current rally, but the company will be coming out with a feasibility study. I think it'll probably come out this fall and at that point, it'll get taken over.

People haven't noticed that Esperanza has almost a 40% position, which gives it control of another company, called Global Minerals, Ltd. (TSX.V:CTG; Fkft:DPF), and CTG's got a very, very attractive silver project. It's called Strieborna. It's a silver/copper deposit in Slovakia that's gotten some attention. It includes 14.3 million ounces (14.3 Moz.) of silver and 48 million pounds (48 Mlb.) of copper in the measured and indicated (M&I) categories and another 8–9 Moz. silver and 28 or 30 Mlb. copper. So, its stake is going to become very valuable. Already, I think the company is up about fivefold over what it paid when it originally made the investment. It also has the Cerro Jumil property in Mexico, which is a bulk tonnage gold deposit. It appears to contain almost 1 Moz. gold equivalent (Au Eq.) in the M&I category. In terms of its inferred resources, it has another 250,000 oz (Koz.). We bought Esperanza at $1.75. We sold when it more than doubled at $4.10, and then we bought it back again at $1. We sold half of that when it doubled, and now it's $1.86.

So, I think that Esperanza is a good buy at this point. We're holding it. I don't have it in as a re-buy for our portfolio, but I think it's an excellent company. It reminds me of another prospect generator that's done very well for us. We went into a little company called Canplats that we bought back about four years ago at $0.22. It was a typical prospect generator with a project in Mexico, and its market cap was about $7 million at the time. Well, the company hit and we sold part along the way; but we sold our final piece when it was bought out at $4.60. So, it was a twentybagger along the way.

TGR: Any other companies you're looking at that you really like?

JP: We've got a couple more prospect generators in there that I'm very hot on. Riverside Resources Inc. (TSX:RRI) is one and Miranda Gold Corp. (TSX.V:MAD) is another. They're getting some press up there because specialists like Rick Rule, Paul van Eeden and Fred Cook are talking about these companies. I think they're great. They give you the kind of high leverage and high return that you like. But the risk is relatively low because the property is good and the geologists behind them are top notch. These guys really know what they're doing.

TGR: One of the companies you talked about last time was Altius Minerals Corporation (TSX.V:ALS). Are you still holding it and what does the company look like to you at this time?

JP: Altius Minerals is just a fantastic company. It hasn't made any mistakes and has about $200 million in the kitty right now. Now, a lot of companies get cash in the kitty by selling shares. Altius hasn't gotten the cash by diluting the stock. President and CEO Brian Dalton has gotten that cash by making some really wise deals selling uranium and copper properties that the company has discovered. This is a fantastic company and the best is yet to come. So, I'm a strong advocate of Altius Minerals. I think that anybody who gets in there and hangs with ALT is going to be a very happy investor.

TGR: So, if an investor doesn't have a position in Altius, is this a good time to buy? Or should we wait for a pullback?

JP: I think it's probably a good buy at this point. It's been bobbing around the $10–$13 area. It could easily be a $20 or $30 stock. The Stealth Investor originally bought it back in April 2006 at $6 and it rose quickly. We sold about one-third of it and bought it again when it dropped to $7. Then we bought a tranche at $5. So, all of our tranches have done extremely well. I'm not a buyer at this point because we're looking for little $10- to $50-million market cap companies, but I'm certainly going to hold on to it.

TGR: Earlier, you gave the examples of copper, steel, zinc and lead. Do you have any of these everyday commodity-oriented juniors in your portfolio that are really intriguing to you at this point?

JP: We've got a couple of others, Mansfield Minerals Inc. (TSX.V:MDR) is one. But I hate to give it away before I actually add the company. My subscribers come first.

TGR: That's understandable. How about some final thoughts on strategic changes readers might consider in their investment philosophies?

JP: Watch what the banking system and the government are doing. I published an article a couple of months ago called Rethinking Gold, a long-term historical look at money and commodities. A better understanding of the big picture should influence what you do in the short term heavily.

TGR: Thanks again for taking the time to share your insights on the investment implications of current world economic events and how this impacts our readers' relative to gold and metals investments.

John Pugsley entered the investment business in the late 1960s and started sharing some of what he'd learned through his first book, Common Sense Economics. The book sold more than 150,000 hardcover copies. The second book he penned—The Alpha Strategy: The Ultimate Plan of Financial Self-Defense for the Small Investor—spent nine weeks on the New York Times' bestseller list and is considered a standard reference for stocking up on food and household goods as a hedge against inflation. He started Common Sense Viewpoint, an investment-economic newsletter covering political, economic and investment topics, in 1975 and published it for 10 years. At its peak, it had more than 30,000 subscribers. He then wrote and published John Pugsley's Journal, for another decade. A popular speaker and talk show guest, as well as a prolific author and successful investor, he is currently pouring his experience and energy into Stealth Investor, a weekly stock advisory that alerts subscribers to potential investments beneath the radar of the big funds and brokerage houses. (Please note that new subscriptions to Stealth Investor have been temporarily suspended.)

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2011 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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